Bond auction fails to enthuse buyers despite high yields

Mumbai: There were not too many takers for government bonds at an auction on Friday despite a steep rise in yield.

The cut-off yield on a seven-year paper was 7.4409%, higher than the Reuters estimate of 7.3260%.

Similarly, the cut-off yield on a 12-year paper was 7.9906% and that of a 23-year paper, 8.2018%. The Reuters estimate for the yield of 12-year paper was 7.8978% and 23-year paper, 8.2008%.

The Reserve Bank of India (RBI) planned to sell Rs6,000 crore of the seven-year bond and Rs4,000 crore of the 12-year bond. Despite offering higher yields, the Indian central bank failed to sell Rs431 crore of the seven-year bond and Rs271.77 crore of 12-year bond, signifying bond dealers’ lack of interest in buying securities even as the market is flooded with government bonds with continuous supply.

The primary dealers, the underwriters of these bonds, had to buy the unsold part.

However, the 23-year bond was sold out.

The government plans to raise Rs4.51 trillion from the market in 2009-10 to bridge an estimated 6.8% fiscal deficit. Out of this amount, RBI, the government’s investment banker, plans to raise Rs2.99 trillion by September. So far, it has raised Rs2.49 trillion.

“Devolvement at these yields shows the level of disinterest market has for government bonds,” said Srinivasa Raghavan, head of treasury at IDBI Gilts Ltd, a primary dealer that buys and sells government bonds.

Terming the cut-off yields as “extremely high”, a dealer with a foreign bank blamed the lack of interest rate signals from RBI. The dealer, who did not want to be named because he is not authorized to speak to the media, said RBI’s open market operation (OMO) has failed to enthuse the market.

RBI buys bonds from the secondary market to take the pressure off from banks and other bond buyers and creates demand for bonds sold through auctions.

“When RBI buys bonds, it demands higher yields but when it sells at auctions it expects lower yields,” the dealer said. Bond prices and yield move in opposite directions.

RBI had cancelled a Rs12,000 crore auction early this month when traders demanded higher yields.

On Thursday, RBI bought only Rs2,657 crore of bonds against its plan to buy back Rs6,0000 crore from the market. Under OMO, RBI plans to buy up to Rs80,000 crore worth of government bonds in the first half of the current fiscal.

According to dealers, future auctions will continue to see higher cut-off yields and RBI may not have any choice but to oblige the buyers. Dealers said immediately after an auction, the bond price drops in the secondary market, forcing buyers in the primary auctions to book losses.

The yield on the 10-year benchmark bond, which dropped to 4.86% in January, has gone up to 7.30% now. It may rise even further on oversupply and lack of demand.

The high government borrowing programme may also crowd out private investments and put pressure on loan rates.